Equity markets have turned more negative as we go into the middle of the week, with inflation and growth concerns potentially triggering the latest declines.
We saw a decent recovery last week as investors reacted to the S&P 500 falling into bear market territory by buying the dip and hoping it marked the end of the decline. There wasn’t anything to be particularly bullish about when it came to the data or the improved prospects for the economic outlook which is why many were referring to it as a bear market rally and perhaps that’s what we’re now seeing unfold.
The euro area inflation data this week offered another reminder of the problems facing the economy and central banks in the quarters ahead which may have taken the wind out of the sails of the recovery trade. While some are wondering whether so many rate hikes will actually be necessary to rein in inflation, it’s far too early to make that assumption and any recovery will struggle to take hold until that changes.
Hawkish BoC lifts the CAD
The Bank of Canada continued its super-sized hiking cycle today and signalled there’s more to come as it tries to get inflation under control. While the decision to raise rates by 0.5% to 1.5% was expected, the language that accompanied the decision was considerably more hawkish. It referenced that the risk of inflation becoming entrenched had risen and that it was prepared to act forcefully in order to meet its 2% target.
Markets are pricing in another 50 basis point hike at the next two meetings followed by 25 basis points at those after and given the language, that may be a little conservative. Still, the Canadian dollar rallied strongly in response to the statements and could be well supported if data continues to support the central bank’s view.
For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/
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